What Economists Can Agree On These Days
- the "London Consensus," a framework for economic development, emerged as a response to perceived shortcomings of the earlier "Washington Consensus." While the Washington Consensus, popular in the 1980s...
- The London Consensus retains some core tenets of the Washington Consensus,such as fiscal prudence and the importance of controlling inflation.
- The Washington Consensus, promoted by institutions like the International Monetary Fund (IMF) and the World Bank, gained prominence during the era of structural adjustment programs in the 1980s...
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The London Consensus: A New Approach to Economic Progress
Table of Contents
Published: November 8, 2023
Origins and Core Principles
the “London Consensus,” a framework for economic development, emerged as a response to perceived shortcomings of the earlier “Washington Consensus.” While the Washington Consensus, popular in the 1980s and 1990s, emphasized deregulation, privatization, and fiscal austerity, the London Consensus-outlined in a 2014 book edited by Tim Besley and Juan Pablo Villar-advocates a more nuanced and pragmatic approach. As described by Andrés Velasco, a key contributor, the London Consensus isn’t a rigid set of rules but rather a collection of economic principles applied with “care and gradualism” (“The New Consensus,” Foreign Affairs, January 1, 2014).
The London Consensus retains some core tenets of the Washington Consensus,such as fiscal prudence and the importance of controlling inflation. Though, it expands the scope of policy considerations to include financial regulation, exchange rate management, and the mitigation of negative consequences from globalization. Specifically, it suggests that policymakers should not hesitate to use foreign-exchange controls to manage destabilizing capital flows (“The New Consensus,” Foreign Affairs, January 1, 2014).
A Response to the Washington Consensus
The Washington Consensus, promoted by institutions like the International Monetary Fund (IMF) and the World Bank, gained prominence during the era of structural adjustment programs in the 1980s and 1990s.These programs frequently enough involved conditions attached to loans, requiring recipient countries to adopt specific economic policies.Critics argued that these policies, while sometimes effective in stabilizing economies, frequently enough came at a social cost, leading to increased inequality and hardship (“Washington Consensus,” Britannica, accessed November 8, 2023).
The London Consensus emerged,in part,as a critique of this one-size-fits-all approach. It acknowledges that economic development is context-dependent and that policies must be tailored to the specific circumstances of each country. It also recognizes that trade liberalization, while generally beneficial, can create losers and also winners, and that governments have a responsibility to mitigate the negative impacts on those affected (“The New Consensus,” Foreign Affairs, January 1, 2014).
Key Components and Considerations
Several key principles distinguish the London Consensus:
- Financial Regulation: Stronger regulation of the financial system to prevent booms and busts.
- Exchange Rate Management: Acceptance of occasional foreign-exchange controls to stabilize economies.
- Trade and Compensation: Recognition that trade liberalization creates both winners and losers, with